Qualified Business Income Tax Deductions
Getting the lowest tax liability is not a skill you need to learn to file taxes. It’s more about what you know and how to apply it. However, many taxpayers miss out on tax deductions and credits simply because they are not aware of them.
Since the beginning of qualified business income deductions after December 31st, 2017, eligible taxpayers are now more aware of the many deductions they could exploit to get lower tax liability.
Qualified Business Income Deduction for Small Businesses
As an eligible taxpayer, you must know that partnerships, sole proprietorships, and S corporations are not subject to taxes. All profits from small businesses are taxed under the business owner’s individual income tax. Chiefly, the December 2017 Tax Cuts and Jobs Act (TCJA) created a 20% deduction on small businesses’ profits.
As much as the 2017 TCJA eliminated several deductions, most of the deductions discussed below remained unchanged.
1. Disability Insurance
Disability insurance is one of the most common types of premiums taxpayers overlook as a tax deduction. Their deductibility is both complicated and limited.
The IRS allows self-employed taxpayers to make deductibles on overhead insurance that pays for their business overhead expenses. This provision applies to persons with long disability periods caused by injury or sickness. However, you cannot deduct premiums for policies that pay for lost earnings due to disability or sickness.
The only disability insurance eligible for deduction is one that covers business overhead expenses when you are out on leave. Disability insurance could cover items like utilities and rent that are unavoidable for the duration of your disability leave.
2. Health Savings Accounts
Health Savings Account (HSA) is another insurance-related tax perk you should be aware of, especially if you don’t have access to group health coverage. HSA combines a high-deductible health insurance policy with a tax-advantaged savings element.
Therefore, all HSA tax contributions, up to the maximum the law permits, are tax-deductible, even for taxpayers who don’t itemize. All earnings accumulate tax-free, provided they’re used to cover qualified medical expenses.
3. Medical Expenses
Medical expenses are only deductible if they surpass a percentage of an eligible taxpayer’s Adjusted Gross Income. This percentage continues to vary due to legislation changes, with the most recent change ranging from 7.5% to 10%. Still, it always stays high enough to prevent most taxpayers from qualifying.
If you have sublingual pending medical bills, you can boost your qualified business income deductions by scheduling other medical expenses or procedures in the same year. A point of caution, if you receive a reimbursement check from your insurance company the following year, you must declare the total deduction that’s reimbursed as income.
4. Unemployment/Worker’s Compensation
Most people tend to confuse unemployment compensation with worker’s compensation. While both benefit the taxpayer, unemployment compensation is usually paid through state unemployment agencies. On the other hand, workers’ compensation is awarded to workers who can’t perform their work duties due to sickness or injury.
- Unemployment benefits – The state considers unemployment benefits as a replacement for your regular earned income. Therefore, they are taxable. You will receive Form 1099-G listing the total unemployment compensation allocated to you throughout the year. This amount must be reported on IRS Form 1040.
- Workers’ compensation – The state does not consider workers’ compensation benefits to be declared as income. This includes survivor’s benefits too.
5. Deductions for Self-Employed
Did you know that you can deduct insurance premiums from your taxes as a self-employed taxpayer or business entity? This includes health and dental insurance premiums and long-term care premiums. You can also deduct vehicle insurance if you elected to report actual expenses, but the car isn’t taking the standard mileage rate.
6. Life Insurance
Life insurance premiums are also deductible as business-related expenses. But that is if the insured is a corporate officer or an employee of the company, and the company isn’t a direct/indirect beneficiary of the policy. It’s always advisable to hire an expert in business tax deductions to help with these types of deductions.
All individual policy owners are also entitled to a tax-free death benefit. Although death benefits are tax-free for business-related beneficiaries, certain situations for corporate-owned life insurance may be taxable.
Life insurance premiums may also be deducted for most non-qualified plans like deferred compensations or executive bonuses. These premiums are considered compensation for executives under these plans’ rules.
7. Other Qualifying Plans
Participants in standard qualified plans like the 401(k) and 403(b) plans through an employer can buy a limited amount of the qualifying plans or a permanent life insurance coverage.
NOTE: all qualifying plans are subject to specific restrictions that must be met for the IRS regulations to consider the coverage “incidental.” Life insurance and death benefits permitted to qualified plans also retain tax-free status and can be used to pay taxes on the plan proceeds when the participant dies.
FMA CPA firm in Clearwater provides business tax services just for you
Do you have any questions about qualified business income deductions and 2020 taxes? Reach out to our business tax professionals for the best business advisory services in Clearwater. Book a free consultation with our CPA firm for business advisory services. Get in touch with us at 727-530-0036 now to schedule a no-cost consultation.